London office market on the rebound

Construction work is under way Thursday on the One New Change project building in London. Demand is increasing for office space in the city’s financial district and some large developers are taking on new projects, evidence of an economic recovery. (AP Photo by Matt Dunham)

Robert BarrAP Writer

London — Demand is rising for the best office space in London’s financial district and some major developers are taking on new projects — signs of a cautious recovery in the wake of a vicious recession.

But it’s too soon, analysts said, to look for flocks of construction cranes to return to the city, because credit remains tight and the economic outlook uncertain.

“I don’t think a boom is in the near term. It’s two or three years out,” said Paul Pulze, analyst at Evolution Securities.

Three big property companies — Land Securities, British Land and Great Portland Estates — published bullish earnings reports recently, and showed a growing interest in construction.

“(Developers) are coming around to the point of view that it is time to go” back into the market, said James Roberts, head of central London research at property consultants Knight Frank LLP.

However, he added, banks are wary of speculative building projects and are more inclined to lend money for buying existing buildings.

British Land officials said they are thinking about reviving plans for a 47-story wedge-shaped tower nicknamed the Cheese Grater, three years after they announced the skyscraper was definitely going up.

Land Securities officials are talking with potential partners about going ahead with a 36-story tower dubbed the Walkie Talkie because of its inward curving exterior. The speculative development has been on hold since gaining planning permission in 2007.

“The commercial property market now enjoys a brighter outlook, but I do not expect the trajectory of growth to be smooth. It may take the U.K. economy a number of years to regain full strength,” said Alison Carnwath, chairman of Land Securities.

British Land officials said the company had committed nearly $720 million to go ahead with three projects, including a joint venture to develop 700,000 square feet for Swiss bank UBS.

“Toward the end of the year, strengthening demand and asset prices in the central London office market saw the economics of development improving significantly,” said Chris Grigg, British Land’s chief executive.

The three projects, totaling 1.2 million square feet, would be ready for occupancy in 2013 or 2014.

Available office space in the city peaked at 13.4 million square feet in the recent downturn, but has fallen in three consecutive quarters to 10.6 million square feet now, Roberts said.

In the third quarter of 2007, just before the credit crunch hit, there was 8.6 million square feet of space under construction in the city. That has fallen to 3.8 million square feet now, a figure that will decline in the near term with little new construction under way, Roberts said.

In a typical quarter, new leases absorb about 800,000 square feet of new space, Roberts said.

But while the supply of new space is decreasing, demand is increasing, particularly because of technological requirements.

“Clearly we are moving into a period where there is a severe mismatch between projects in the pipeline and demand,” he said.